RSM225H1
Textbook Notes
Chapter 24: Sole Proprietorships and Partnerships
Three forms of most businesses:
o Sole proprietorship
o Partnership
o Corporation
A corporation may only be formed under a statute in a prescribed manner
and registered with the designated government department.
The first decision that an individual or group of persons looking to establish a
company should be whether to incorporate or not.
o Certain professions do not permit their members to carry on their
practices in the form of a corporation however.
Sole proprietorship: an unincorporated business owned by a single
individual.
o They must keep proper accounts for income tax purposes but income
is reported on the personal income tax form.
o Most provinces require the name of a business to be registered unless
it is carried under the name of the actual owner.
Laws regarding public health, zoning, and taxation apply to all businesses.
Partnership: the relationship between two or more persons carrying on a
business with a view to profit.
o May be natural persons (individuals) or legal persons (corporations).
o Advantage:
Pooling of resources/knowledge/skills
o Disadvantages:
Stalemates when trying to make decisions
Results in valuable lost time.
Incompetency of one member may lead to losses suffered by
other members
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Starting about the middle of the 18 century, problems concerning almost
every aspect of partnerships had become the subject of legal decisions.
o Resulted in a complete body of rules but the number of decisions
made it hard to discover the broader principles.
In 1890, the Britisih Parliament passed the Partnership Act which brought
together the numerous cases under more general principles and codified the
law.
o The English Act (same form as the Partnership Act) has been adopted
by all common law provinces.
Three types of partnership:
o General partnership
o Limited partnership
o Limited liability partnership
Partnership is a consensual and contractual relationship. o A written partnership agreement is normally drawn up and signed by
all partners.
In the absence of a written/oral agreement, courts may still deem one person
a partner by looking at whether they acted as one or not.
The Partnership Act only applies to partnerships that satisfy the above
definition.
o I.e. two people jointly holding a property being rented out, aren’t
considered to be a business thus are not a partnership.
o Isolated transactions undertaken jointly do not by themselves make
the parties partners.
A sharing of gross receipts does not necessarily mean a partnership exists.
A receipt of a share of the profits of the business does not amount to a
partnership if it is part of an arrangement to:
o Repay a debt owed
o Pay an employee or agent of the business as part of his remuneration
o Pay an annuity to a widow, widower, or child of a deceased partner
o Repay a loan under which the lender is to receive a rate of interest
varying with the profits
o Pay the seller of a business an amount for goodwill that varies
according to the profits
The courts consider profit-sharing that coincides with the ratio of capital
contribution to be strong evidence of partnership.
If one person has take some active role in the business, particularly in
making important decisions, when added to the fact that profit has been
shared, will usually suffice to establish the first person as a partner.
A partnership has no independent existence (as with corporations) and
merely represents the collective rights and duties of all partners.
Firm: collective reference to the partners in a partnership.
The Partnership Act accepts that partners may agree to continue the
partnership should one member die/be bought out/be fired etc.
The Act recognizes that the partnership may own property that is distinct
from the property of the individual partners.
o Partners don’t own the property itself, but rather an interest in that
property.
Partnership creditors have first call against partnership assets before the
personal creditors of an individual partner.
o The opposite is true for personal estate.
Under the Bankruptcy and Insolvency Act, personal creditors have first call
on personal estate before partnership creditors for a person who becomes
bankrupt.
Legal proceedings can be started using the name of the partnership rather
than the names of the individual partners.
Partnership agreement: an agreement between persons to create a
partnership and (usually) to set out the terms of the relationship.
Partnerships may break up due to: o The partnership becoming a corporation
o Issues that arise between the partners
o The business venture having proved unprofitable
A partnership agreement will normally include:
o Identity of the partners
o Name of the firm
o Nature of the business to be carried on
o Duration of the relationship
o Method of terminating the partnership
o Rules for introducing new partners
o What is to happen on the retirement or death of an existing partner
o Participation in management and in making major decisions
o Contribution of each partner in terms of work and responsibilities
o Capital contribution of each partner
o Ownership of property used in the business
o Sharing of profits and losses
o Procedure for resolving disputes
Some gaps in the agreement may be filled by the Partnership Act, which sets
out a number of implied terms that apply in the absence of any provision in
the agreement to the contrary.
A partnership agreement should be drafted with expert advice and
assistance.
o To avoid ambiguous words and misunderstandings.
Registration of the partnership with the provincial government is needed in
certain cases.
o I.e. registration of a partnership in BC is only needed when they will
be engaging in trading, manufacturing, or mining.
The register allows a potential plaintiff to serve each partner with notice of
an action if they wish to do so.
o Also allows prospective creditors and other suppliers to check the
accuracy of the information given by a partner about the membership
of the firm.
Partners are personally liable for the debts of the partnership (most
important characteristic of a partnership).
Any acts done by a partner within the scope of his apparent authority and
relied upon by an outsider bind the firm and all the partners.
Joint liability: the situation where each of a number of persons is personally
liable for the full amount of a debt.
o Partnership creditors may go after personal estate of the owners if the
partnerships assets cannot cover the initial debt.
If a plaintiff brings action against only some of the partners and obtains
judgment against them and their assets are insufficient to satisfy the
judgment, she will not be able to sue the other partners for the deficiency.
If a partner pays the firm’s debts in full, he is entitled to be reimbursed by his
co-partners for their shares of the debt. A newly admitted partner to the firm is not liable for the firm’s prior debts.
Novation: agreement with the partners remaining in a firm and with the
firm’s creditors to free the obligations of a retired member for the firms
debts.
If person A pretends to be a partner of a firm and a person B gives credit to
the firm on the faith of that representation, person A is liable to B.
To protect himself against possible liability for future acts of his partners, a
retiring partner should:
o Ensure that all existing clients of the firm are notified
o Place a notice in the official gazette of the province
o Ensure his name is removed from the register
o Ensure to the best of his ability that any letterhead are destroyed or
altered to remove his name
If credit is extended to a company by a person that reasonably thinks the
retired partner is still there, that partner may be held liable for the debt.
The Act makes the firm liable for “any wrongful act or omission of any
partner acting in the ordinary course of the business of the firm”.
A partner who acts in a manner that is contrary to the partnership agreement
commits a breach of contract and may be liable to compensate the other
partners for any damage resulting from the breach.
Implied terms by the Act (if not expressed in the agreement):
o Partnership property
All property brought into the firm
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